AIG knew of potential problems in valuing swaps

Monday, October 13, 2008, 07:48

Top executives at American International Group Inc knew of potential problems in valuing derivatives contracts, known as credit default swaps, long before questions about the risky transactions caused its stock to plummet, the Wall Street Journal said, citing documents released by congressional investigators.

The problems with these swaps would have driven AIG into bankruptcy - if not for a $123 billion federal rescue, the Wall Street Journal said Sunday in a story on its website.

A federal criminal probe is investigating how candid AIG executives were with investors at a December 2007 investor conference and whether executives at AIG's financial-products unit, which sold derivatives contracts, misled AIG's outside auditor last fall, the Journal said.

At congressional hearings on Tuesday, a former internal AIG auditor wrote that he had expressed concerns early on about being excluded from conversations about the swaps valuation, the Journal said.

“The auditor, Joseph St. Denis, wrote in a letter to the House Committee on Oversight and Government Reform that in early September 2007, he learned that AIG's financial-products unit had been asked for billions of dollars in collateral related to derivatives it had sold,” the newspaper said.

Credit-default swaps protect buyers against default risk on other investments. AIG believed the likelihood of making payouts was remote, the Journal said.

St. Denis wrote he wasn't personally involved in the AIG unit's swaps valuation. In late September 2007, according to St. Denis's letter, the AIG unit's head, Joseph Cassano, said he had “deliberately excluded” St. Denis “because I was concerned that you would pollute the process,” the WSJ said. St. Denis said in his letter he resigned on October 1, 2007. AIG's chief auditor, Michael Roemer, asked him later that month why he quit. St. Denis said he told Roemer about Cassano's comment.

“That would indicate that a key AIG executive last fall was aware of Mr. St. Denis's concerns,” the Journal said.

AIG declined to comment on the documents or make Roemer available for comment, the WSJ said. An AIG spokesman did not return Reuters' phone calls on Sunday. (Reuters)

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